2021 Social Security Trustees Report Demonstrates Pandemic Impact

By Mitchell J. Smilowitz, CPA

The COVID-19 pandemic had a negative impact on the long-term finances of Social Security according to the 2021 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.

The Trustees project that the Old-Age and Survivors Insurance Trust Fund (OASI), which supports Social Security retirement benefits, will become depleted in 2033, one year sooner than last year’s estimate. Once the OASI is exhausted, Social Security retirement benefits will rely solely on payroll taxes. The Trustees anticipate that payroll taxes will only support 76% of benefits (down from 79% in the 2020 report).

The Disability Insurance Trust Fund (DI) is estimated to be depleted in 2057, eight years earlier than last year’s projection, with 91% of benefits still payable through payroll taxes.

The Trustees attribute the deterioration of Social Security’s long-term finances to the COVID-19 pandemic. In addition to the job losses and resulting reduction in payroll taxes, the pandemic also appears to have caused many workers to retire sooner than anticipated.

COVID-19 exacerbated the long-term demographic challenges facing Social Security. The share of the population age 65+ will climb steeply over the next 20 years, from 16.3% today to an estimated 20.4% in 2040. This means that there will be fewer workers paying into the system for each beneficiary. In 1960, five people paid into Social Security for each person receiving benefits. In 2020, 2.6 people paid into the system for each beneficiary. By 2040, Social Security demographers project that only 2.1 people will pay into the system for each beneficiary.

2021 is expected to be the first year since 1982 that the total annual cost of Social Security will exceed the total annual income of the program. Total annual income includes payroll tax contributions, income taxes paid on benefits and interest income from the OASI and DI. The gap between the income Social Security receives and the benefits paid by the program is covered by the assets in the Trust funds. As a result, the OASI and DI are expected to decline during 2021. Without Congressional action, the total annual cost of the program will continue to exceed total income into the future.

Social Security Needs Shoring Up

As discussed, when the Trust Fund reserves are depleted, the Trustees estimate that payroll taxes will be sufficient to pay only 76% of scheduled benefits. To maintain full benefits will require Congressional action.

Experts have suggested several possible fixes for the program.

  • Raise the maximum amount of wages subject to the payroll tax. Americans currently pay Social Security taxes only on the first $142,800 earned annually.
  • Raise the Social Security portion of the payroll tax rate from the current 6.2%.
  • Invest a portion of the OASI and DI Trust Funds in the stock market. Currently, the Trust Funds can only invest in U.S. Treasury securities.
  • Increase the ages for early and full retirement.
  • Reduce benefits.

If Social Security benefits are reduced, you will need to rely more heavily on the financial resources you’ve saved during your working years. This makes it essential that you strive to contribute 10-20% of your salary to your retirement account each year. We understand that this goal is ambitious and we are available to assist you in developing a plan that is both specific and achievable. Contact us via email or at 888-JRB-FREE (572-3733).

The JRB will continue to monitor the future of Social Security and update you about the status of the program.

September 2021